On the Role of Product Quality in Product Reallocation and Macroeconomic Dynamics

Ako Viou Bahun-Wilson ()
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Ako Viou Bahun-Wilson: Université de Sherbrooke

Cahiers de recherche from Departement d'économique de l'École de gestion à l'Université de Sherbrooke

Abstract: Recent empirical investigations by Argente et al. (2018) reveal that product reallocation, i.e. creation and destruction of products, happens through two leading margins: entry and exit of production modules within firms, the so-called "extensions", and changes in the characteristics of products within incumbent production modules, the so-called "improvements". This paper develops a DSGE model in which product reallocation involves these two margins and examines the impact on macroeconomic dynamics. I show that relative to the standard model that only accounts for extensions, the model augmented with product improvements does a better job at explaining the dynamics of production modules within firms and the firm-level TFP. A recession facilitates the production of low-quality/low-cost products, which allows the survival of low-productivity modules that would not survive in a fixed quality environment. As the recessionary shock dissipates, the share of high-quality products increases, eliminating low-productivity and low-quality modules and increasing the firm-level TFP. My results illustrate the importance of recognizing the dynamics of product characteristics within firms’ production lines in addition to the dynamics of production lines per se to understand business cycles.

Keywords: product creation and destruction; multi-line firm; quality switching; business cycles. (search for similar items in EconPapers)
JEL-codes: D24 E23 E32 L15 L60 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2022-03
New Economics Papers: this item is included in nep-bec, nep-com, nep-des, nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:shr:wpaper:22-01

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